As incumbent companies go through their own versions of Clayton Christensen’s disruptive innovation, I imagine early observations about the changes-to-come are similar to these seen last week with Google’s Chrome OS announcement…

Item #1:

But while I’m sure Chrome OS will pick up some fans, I have a hard time seeing this as the way of the future for computing.

It’s certainly interesting and ambitious to state that the entire application platform will consist of web apps. If anyone was going to build such an OS, it’d be Google. Much of the initial commentary regarding Chrome OS has been wholly positive, but one common note of skepticism has been with regard to the “web apps are the only apps” aspect, with the frequent point of comparison being to the 1.0 release of the iPhone OS.

Netbooks may be important, but they remain a tiny part of the world’s PC sales. Google’s bet is predicated on strong demand for weak computers.

Google is counting on users of small computers not being tied to specific applications and being willing to accept low cost and, perhaps, ease of use over a more familiar and more powerful environment.

The quotes above reflect a rationale perspective on the fate of netbooks and an-all SaaS computing experience. After all, no one does that today. Most people haven’t even looked at the web-only alternatives out there. Microsoft Office is a client app. Adobe is a client app. File directories are client apps for files on your hard drive.

Why does anyone need a web-app only experience? Well, note Microsoft’s announcement of its web-based Office 2010. Something is afoot. Both Google and Microsoft are pushing forward significant initiatives that will increase the percentage of computing done via SaaS. What does Clayton Christensen’s theory say about this?

Disruptive Innovation

A disruptive innovation is one that upends the existing structure of an industry, often sending incumbents into niche positions, and niche players into incumbent positions. Three qualities define it:

New technologies start out less functional than existing technology

New technologies find their niche markets

At the outset, it’s really hard to believe the new technology will ever displace the incumbents

Pretty much sums up the idea of all web-based computing.

Check out the chart below, which diagrams sustaining and innovation over time and performance:

Probably the single most important thing to note about this graph is that the incumbent companies (blue line) continually add features to their products. This effort expands their addressable markets, as more and more niche segments are covered. It’s a rationale, smart way to grow.

But at some point, the incumbents’ innovations overshoot what mainstream users need. As Christensen notes, performance exceeds what customers can utilize. This is what happens as companies expand into niche markets.

Which brings us to the PCs of today. They are marvels, providing a slick experience for users and able to accommodate a host of new applications. But if I were a betting man, I’d say the most common activities people do with their computers are:

Surf the web, engage in social media

Email

Write documents

Build spreadsheets

Create presentations

Consume and work with media (video, music, graphics)

Use web-based business apps

Among those activities, what’s the magic of client-based computing? The media-related activities perhaps require the horsepower of a client app. But even those are getting better with web apps.

Web-based apps fulfill the first bullet of early disruptive innovation above – they’re not as full-featured.

Second bullet is the initial niche that wants to use the less powerful alternative to incumbents. For web-based computing, I can see two markets:

Small businesses – lower cost, less hassle than installed apps

Students – more comfortable with third parties holding data, low cost, activities are mostly writing and web access

Those are the initial toeholds into the operating system market. Getting significant share in a couple segments is critical to getting the attention of application developers.

The Web Apps Are Coming Along

Let’s start with the apps most commonly used in work contexts: documents, spreadsheets and presentations. Zoho has been at it for a while now, and provides a very functional set of apps. Google Docs continue to evolve toward better functionality. And of course Microsoft has joined the SaaS movement. The TechCrunch article about Microsoft Office 2010 notes:

Most certainly a direct challenge to Google Apps, Microsoft is rolling out lightweight, FREE, Web browser versions of Word, PowerPoint, Excel and OneNote. All based in the cloud, the web-based versions of these products have less features than their desktop cousins but still let users that users basic tools to edit and change documents.

Already inside the enterprise, wikis are quite functional. As alternatives to writing up documents and emailing them around, they are quite powerful. Atlassian Confluence, Socialtext, JSPwiki and others are highly functional. They offer a formatting experience similar to the most commonly used functions of document applications.

It’s true that there are a number of graphics editors online, but most fail to come anywhere close to the functionality of Adobe’s iconic software. Until now.

The ecosystem to provide online apps with functionality comparable to client apps is growing.

My Personal Evolution to SaaS

I’m a former banker, then I did product management at eFinance and Pay By Touch. In those jobs, I never bothered with hosted apps. I certainly never thought about wikis. I did my writing in Microsoft Word. At Pay By Touch, I was introduced to the Confluence wiki. I used it because engineering wanted me to, but only as a centralized document repository. I’d rather have emailed the documents around.

It was at Connectbeam that I started to really *get* wikis. The ease of writing on them. The value of a common place to find and share documents. I found the core rich text editing functions of a wiki to be quite sufficient for what I need.

When I was noodling on a business idea 18 months ago, I wrote everything up on Google Docs. It was an easy way to share the documents while updating them as often as I needed to.

More recently, the client applications TweetDeck and Seesmic have been getting a lot of attention. I’ve resisted them, because I just can’t see downloading and running these apps. They take their toll on your PC, as Louis Gray wrote:

For those Web-addicted souls who spend a good deal of their day buried in Twitter, seeing their friends updates and exchanging conversations, most software options have required the installation of Adobe AIR software, which to date has whirred your CPU to life, turning on laptop fans, and chewing through memory. The work to throttle down load on RAM and CPU is a constant battle, which both Loic’s team and Iain Dodsworth of TweetDeck have been working on since their products debuted.

In contrast, logging into the new Web version of Seesmic doesn’t feel like you’ve sacrificed your computer power to get your Twitter fix, and you don’t give up features either.

In short, whenever I can make a move to web-based apps, I’m doing it. I’ve come a long way from my Bank of America days.

Certainly the idea of PCs as basic on-ramps for doing work via the web has been around for a long time. In 1996, Larry Ellison believed that network computers would outsell conventional PCs by 2000. Well, we see how that turned out.

In 2009, things have changed remarkably. First, usage of SaaS for applications has grown significantly, although it’s still small as a percentage overall. Second, people’s comfort with web-based computing has grown tremendously. Most enterprise software is now delivered as a web application. Salesforce has been a tremendous trailblazer here. And Facebook is fostering a greater comfort with sensitive data held by a third party.

Finally, Google is a titan. Oracle was (and still is), but in 1996 it was the database company. No one knew what to make of its network computers. Google is an entirely different animal. It has established credibility with its Google Apps. And presumably, any web app will work well on the Google Chrome OS. Including Microsoft’s new cloud Office offering.

This doesn’t stop Microsoft from coming out with its own web-based OS. Expect that if the Chrome OS seriously threatens. A lower cost OS for low-cost PCs to use low-cost web apps.

Microsoft’s announcement is huge because the Office suite is a brand used and trusted by millions of people. With their marketing heft, this is a significant boost in the credibility of SaaS computing. Microsoft also is a student of history, and clearly doesn’t want to risk the marginalization seen in Clayton Christensen’s studies of disruptive innovation.

The past two weeks have seen two significant milestones on the SaaS front.

This brings me to my final point. Market transitions don’t happen that quickly. The Google and Microsoft offerings won’t be ready for a while. And existing hardware, software and habits are going to change overnight. We will still have client-based applications for quite a while.

But let’s see how the small business and student markets take to these efforts.